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Summary

  • Expansion plans in both copper and oil that have attractive fundamentals.
  • Attractively valued based on strong earnings profile and growth plans.
  • Expects to sell onshore energy assets to reduce debt to acceptable levels.

The second quarter was a transition for Freeport-McMoRan Inc. (FCX) that recently stripped Copper & Gold out of its name. Even with the issues in Indonesia holding back sales of copper and gold, the company produced a solidly profitable quarter.

Freeport-McMoRan continues the path to expanding copper mines in the U.S. and energy production in the Gulf of Mexico while planning some large onshore energy asset sales to lower debt. The resolution in Indonesia sets the company up for a strong growth trajectory going forward, all while Freeport-McMoRan reduces the emphasis on regions with governments potentially hostile to future operations.

The market will need to keep an eye on the copper market with other miners such as Southern Copper (NYSE:SCCO) adding production. In the short-term though, Freeport-McMoRan will also benefit from upcoming production from a couple of Anadarko Petroleum (NYSE:APC) deepwater GOM projects.

Domestic Copper Production

A key growth cog is the expansion of domestic copper production and the quarterly report highlighted some encouraging trends in that segment. Freeport-McMoRan operates five mines in Arizona and two in New Mexico. The company is aggressively expanding the 85% owned Morenci mine in Arizona to approach annual production of 1 billion pounds in 2015, compared with 564 million pounds in 2013. The company began start-up activities of the new facilities in May with an expected ramp to full production by the end of this year.

For the second quarter, domestic copper sales reached 423 million pounds, compared to 372 million pounds in the prior year period. For the full-year, copper sales in the North America division should reach 1.7 billion pounds from 1.4 billion pounds. More importantly, the unit net cash costs declined to $1.70 per pound from $1.92 per pound last year. The numbers are starting to near the costs of South America that averaged around $1.50 per pound in the past year and far better than the high costs in Indonesia due to all the interruptions in the last year. Long-term though, production unit costs will remain slightly higher than other parts of the world.

While Freeport-McMoRan is working on another massive expansion project at Cerro Verde in South America, the competition isn't sitting down with Southern Copper expected to increase production by 130,000 pounds this year with an expansion project in Peru. For Q214, the copper miner produced 165,369 metric tons for an annual increase of 4.9%. In total, the company expects to increase copper production from 670,000 tons last year to 800,000 tons once the Tia Maria project in southern Peru reaches production.

Ramping Up Deepwater Growth

The earnings release has a long list of GOM projects in the works through 2016. The most promising is the Holstein that recently placed a sidetrack well on production at 3,600 Boe/d. With a production platform capable of producing in excess of 100 Mboe/d, the company plans to drill a total of seven wells from the Holstein plus an additional five subsea tie-back wells from the Holstein Deep and Copper prospects. Additional prospects include the Lucius and Heidelberg that included positions purchased from Apache (NYSE:APA) with Anadarko leading the project. Other projects are highlighted below:

(click to enlarge)

Source: FCX Q214 Presentation

Outside of the deepwater, the company has a bunch of prospects in the inboard lower tertiary/cretaceous under development. Those areas include the Highlander, Blackbeard West No. 2, and the Davy Jones No. 2 plus additional prospects with development plans in the future.

In total, Freeport-McMoRan expects to reach oil and gas sales of up to 225 Mboe/d by 2017 despite more asset sales. The recent Eagle Ford sales will cause production to drop to 12.2 MMboe during the third quarter from 16.0 MMboe in the second quarter. The sales levels will quickly rebound by the fourth quarter due to the Lucius prospect reaching production.

Reducing Debt

One of the more interesting revelations from the earnings call was the specific intent to sell $4 to $5 billion worth of onshore energy assets while adding a few hundred million to the existing Gulf of Mexico assets. In total, Freeport-McMoRan plans to reduce the debt position from the current level of around $20.3 billion to only $12 billion by 2016.

The company expects to reach that goal from a combination of asset sales and expectation of substantial operating cash flow in 2015 and 2016 of at least $10 billion annually to nearly $15 billion if copper prices rebound.

Bottom Line

Freeport-McMoRan remains in expansion mode with both large-scale copper and energy projects. The projects shift the company away from unstable governments such as Indonesia providing more stability going forward. With a 3.4% dividend yield and an attractive PE of only 12.8x 2015 earnings, Freeport-McMoRan remains an attractive stock with plenty of long-term catalysts.

Source: Freeport-McMoRan Expansion Numbers You Shouldn't Miss